Thursday, July 05, 2012

Why the LIBOR rigging had no impact whatsoever

As a service to humankind, this blog is making available at no charge to everyone an argument that will save hundreds of millions of pounds in legal and consulting fees concerning the LIBOR rigging scandal. This argument required countless hours to develop and involved the use of highly sophisticated computer technology, as seen in the diagram above. Yet through the use of advanced concepts not unrelated to those used to search for the Higgs boson, we have conclusively shown that the alleged rigging of reported LIBOR by the various banks was irrelevant. The logic is as follows.

Everyone says that the scandal comes from the fact that the interest rates in other loan markets were set as LIBOR plus a spread, therefore if LIBOR was understated or overstated, the rates in those other markets must have been affected as well. Picking one hypothetical other market, let i stand for the interest rate in that market, L the quantity of loans, S the supply of loans, and D the demand for loans. Through the miracle of economics, that market has an equilibrium interest rate and quantity of loans denoted i* and L*.

Now here's the thing: you can break up that i* into any sets of numbers that add up to it, but through the aforementioned miracle of economics, there's only one interest that brings about equilibrium in that market. Unless you've got some reason why the process for reporting LIBOR affected S and D, there's no reason why the interest rate should have changed. So if LIBOR was off by 1 percentage point, then somewhere along the chain the equilibrium will involve adding 1 percent to keep the market where it was before, as illustrated by our highly complex equation below the diagram which relies on the deep mathematical property that 1-1=0.

OK, do we actually believe this? We're not sure, but it would advance the argument if this was taken as the baseline position.